Table of Contents
Who Can Make Investments in Focused funds?
Investments in Focused funds – Pros and Cons
What are the Important Factors to Consider before Investing in Focused funds?
Investment can be quite a tricky game. In case of most mutual funds, the purpose is to spread investments across definite industries and assets. This is useful for risk reduction purposes. However, there can be opportunity costs if investors go too far with their diversification strategies. Focused funds are necessary for this reason. Read and know all about focused funds, which can be very useful if you are an investor who is probably trying to make an entry into the trading domain.
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What are Focused funds?
As the name indicates, these are a handful of extremely promising stocks that are chosen with the expectation of getting long term profits. The idea here is to build an excellent investment portfolio comprising of a small amount of these promising stocks, while being able to maintain a sensible diversification approach.
According to SEBI regulations, there is a limit to have focused funds of up to 30 stocks. Investors need to allocate a minimum of 65% of their assets to equity-related and equity instruments. These are commonly referred to as best idea funds.
As compared to most of the mutual funds where investments can be made in as many as 100 or more stocks, a focused mutual fund is outstanding due to its unique rules. In case of focused funds, investments are not spread across many stocks. Rather, there is focus on promising stocks in the market.
In case of focused funds, the main objective is to get maximum possible returns by making investments in assets that perform the best. Naturally, it is important to choose stocks carefully according to the investment mandate.
Also read: Before You Invest in ELSS funds: An Important Checklist.
Who Can Make Investments in Focused funds?
These funds are the right choice for experienced investors or those having a higher risk appetite.
It is also a good option for investors who are interested in a longer investment time horizon and can wait for the same duration to obtain a very high yield.
Very high returns on investment can be guaranteed with long-term investment horizon.
However, all said and done, it is very important to make proper choices in the first place. It is necessary to conduct thorough research in order to choose the best stocks with high return potential over the long term.
Investments in Focused funds – Pros and Cons
Investing in focused funds comes with both advantages and disadvantages.
Pros of Investments in Focused funds
These are a few of the advantages of investments in focused funds:
High return potential
Only a select few high-potential stocks are targeted by focused funds. This raises the chance for obtaining very high returns when those stocks show a good performance.
Active Management
Experienced fund managers actively supervise the portfolio and make informed decisions regarding the same, which can help maximize the return potential.
Adaptability of funds
With these types of funds, investments can be made in companies or organizations of any size – which include large caps, mid caps and small caps. There is the flexibility for portfolio adjustment as per market conditions, which ensures the adaptability of these types of funds.
Cons of Investments in Focused funds
Know about some of the disadvantages of investing in focused funds:
Greater risk
Because of limited amount of diversification, focused funds carry more risk as compared to more diversified options. There can be a bigger impact when a handful of stocks perform poorly.
Reliance on Fund Manager
The success of investment with focused funds is heavily dependent on the stock-picking abilities of the fund manager. If he or she chooses the stocks poorly, there can be a risk of underperformance.
What are the Important Factors to Consider before Investing in Focused funds?
These are some of the key factors to take in consideration before making investments in focused funds:
Tax Implications
It is important to remember that in case of these funds, the investment is mainly made in stocks. Naturally, these are taxed similar to equity funds.
Long-Term Capital Gains (LTCG) get taxed at 10% for profits that surpass ₹1 lakh annually. If there is withdrawal of Short-Term Capital Gains (STCG) within 1 year, there can be 15% tax payment involved.
Greater level of risk
Focused funds are focused portfolios of 30 stocks and it is important to take major positions in case of each stock. This leads to the portfolio not being diversified properly. This is a cause for concern and risk in case of such types of funds.
Expertise of fund manager
It is very important to take into account the reputation of the fund manager as well as the fund house standing in support of such types of funds. Investors need to verify the track record and success of the same in a specific sector or industry, so as to be confident of making reliable and safe Investments.
Expense Ratio
In an expense ratio, different types of fees are involved – which include administrative costs and management expenses taken from the chosen fund of the investor.
For investors, it is important to understand the various costs related to their preferred fund manager before making investments in any of the focused funds.
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Conclusion
All in all, diversification of investments across different industries and assets is usually a good way of risk reduction. At times however, there can be losses due to spreading of investments too thin. This is where focused funds can be useful. These types of funds concentrate on a small amount of high potential stocks, in order to make gains over the long term. It is not about quantity but quality.
But it is important to keep it in mind that with fewer stocks involved, the risk is higher in case a stock shows poor performance. The skills of a fund manager play every important role in this case. If investors do not mind taking more risk, are ready to make investments over a longer duration and happen to be experienced, it can be worthwhile to consider investing in these funds.
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